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April 12, 2013

In Shift, Conservatives Line Up Against Big Banks

Republicans are joining the dog-pile on Wall Street

Rep. Jeb Hensarling of Texas spoke in November as a member of the deficit supercommittee. (Photo: AP)

In the shifting alliances that are characteristic of politics, the presumed closeness of Republicans and Wall Street may be increasingly tested.

The notion of these political bedfellows was probably always more myth than reality. After all, Wall Street stiffed Republican John McCain, heavily supporting President Barack Obama in the 2008 election. Big Finance switched sides in 2012, losing its bet on Mitt Romney.

Also, Republican financial ties to Wall Street did not always match conservative ideological opposition to government support, via bailouts, of large financial institutions.

And similarly, populist liberals assailing large banks has often been at odds with Democratic support for regulations, such as the Dodd-Frank Act, which critics have argued have the effect of ensconcing the largest banks in their dominant position.

Exhibit A for the changing relationship between Wall Street and Republicans is Jeb Hensarling’s assuming the chairmanship of the House Financial Services Committee.

The conservative Texan lawmaker is on record as supporting increased capital requirements for large financial institutions, something that liberal foes of Wall Street like Sen. Sherrod Brown (D-Ohio) have long supported. But, then again, Brown’s principal ally in boosting bank capital ratios has been Sen. David Vitter (R-La.).

Exhibit B in this changing relationship is a Washington Post column published in February by conservative columnist George Will urging conservatives to enthusiastically support “relentlessly liberal” Sherrod Brown. Writes Will:

“By breaking up the biggest banks, conservatives will not be putting asunder what the free market has joined together. Government nurtured these behemoths by weaving an improvident safety net and by practicing crony capitalism.”

All senators of both parties supported a Brown-Vitter symbolic measure that calls for eliminating economic advantages enjoyed by large banks, though the partisan breakdown of a full legislative package on breaking up big banks, currently being drafted by Brown and Vitter, remains to be seen.

Exhibit C in the conservative campaign against banks—again, always present ideologically if not always in terms of votes—is an issue brief from the conservative Heritage Foundation, published this week.

In it, senior research fellow James Gattuso called breaking up the big banks the right question, if the wrong answer. The think tank’s regulatory expert says the thrust of the argument for breaking up too-big-to-fail banks is that regulators, fearing a collapse of the economy, will rush to shore up failed institutions, putting taxpayers on the hook.

Gattuso doesn’t want to expose the public to this risk, but views proposals to cap bank size as overly simplistic and ineffective at avoiding bailout risk.

He points out that a small bank that is highly interconnected could theoretically present greater systematic risk than a big bank, and quotes former Obama official Steve Rattner to the effect that the most spectacular failures in 2008 (e.g. Bear Stearns, Lehman Brothers, AIG and Fannie and Freddie) were not deposit institutions yet presented serious systemic threat.